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Knowledge in Development Note: Measuring Global Poverty

The original “$1 a day” poverty line—introduced by the 1990 World Development Report (WDR) on poverty—aimed to assess poverty in the world as a whole by the standards of what poverty means in the poorest countries.[1] This is clearly a conservative basis for measuring global absolute poverty. One could hardly argue that the people in the world who are poor by the standards of the poorest countries are not in fact poor. This gives the global poverty line a salience in focusing on the world’s poorest that a higher line would not have. The first Millennium Development Goal (MDG1) is to achieve the 1990 $1 a day poverty rate by 2015.

In the light of these PPP revisions, simply updating the old international poverty line for inflation in the United States gives a poverty line that is well above the lines found among the poorest countries at 2005 PPP. Adjusting solely for inflation in the United States, the 2005 value of the Bank’s prior international poverty line is $1.45 per day. However, this calculation ignores the fact that the 2005 PPPs for the poorest countries have been revised upwards. Adjusting for this, it brings the new poverty line down to $1.25.

The results indicate that, across countries, national poverty lines tend to rise with mean consumption above a critical level, but that the relationship is quite flat below that level (see Figure 1). This pattern in the data is consistent with past work (Ravallion and others 1991, see note 1). It fits well with the interpretation of a national poverty line as a “social subjective poverty line,” defined as the level of consumption below which people in that country tend to think they are poor, and above which they do not. The interpretation is that in very poor countries levels of living are so low generally that there is little scope for concern about relative deprivation.

The World Bank’s researchers proposed a new international poverty line of $1.25 a day for 2005, which is the mean of the lines found in the poorest 15 countries in terms of consumption per capita. The level of this poverty line is quite robust to the choice of the poorest 15 countries. However, it makes sense to focus on the poorest 15 since these correspond closely with the critical level of consumption above which the poverty line tends to rise.

In the light of these PPP revisions, simply updating the old international poverty line for inflation in the United States gives a poverty line that is well above the lines found among the poorest countries at 2005 PPP. Adjusting solely for inflation in the United States, the 2005 value of the Bank’s prior international poverty line is $1.45 per day. However, this calculation ignores the fact that the 2005 PPPs for the poorest countries have been revised upwards. Adjusting for this, it brings the new poverty line down to $1.25.

Poverty measures for 2005

How the World Bank calculates global poverty

National poverty lines for a reference group of countries are converted to a common currency using the purchasing power parity (PPP) rate for consumption. Taking an average of these lines gives the international line.

The international poverty line is converted to local currencies in the benchmark year (2005) using the same PPPs and then converted to the prices prevailing at the time of the relevant household survey using the best available CPI for that country (split urban-rural when feasible).

Then the poverty rate is calculated from that survey by standard methods.

Interpolation/extrapolation methods are used to line up the survey-based estimates with these reference years, including 2005.

Population weighted aggregate measures are then formed by region and globally.

The aggregate poverty count will not in general be independent of the reference year, even if the underlying data are the same; this is a widely acknowledged feature of international comparisons, whether it is a poverty measure or national output being compared. However, this is a moot point given that the data have changed so much from one ICP round to another. Given these changes, it makes sense that global poverty measurement has followed the common practice in other international comparisons of only doing the PPP conversion at one date, and using existing national price data for inter-temporal comparisons. The Box summarizes the steps in measuring global poverty.[2]

Using almost 700 household surveys for 115 developing countries, World Bank researchers estimate that 1.4 billion people—25 percent of the population of the developing world—were poor by the $1.25 a day definition in 2005.[3] Using the old $1.08 line in 1993 prices, slightly less than one billion people were poor in 2005. So the new data suggest that poverty is more pervasive than was previously thought.

Table 1 provides a regional breakdown of aggregate poverty estimates for 2005, for each of the five poverty lines: (i) $1.00 a day at 2005 PPP, which is very close to the national poverty line used by the Government of India in 2004/05; (ii) $1.25, the mean poverty line of the poorest 15 countries (as discussed above); (iii) $1.45, as obtained by updating the 1993 $1.08 line for inflation in the US; (iv) $2.00, which is the median of the sample of national poverty lines for developing and transition economies; and (v) $2.50, twice the $1.25 line, which is also the median poverty line of all except the poorest 15 countries in the same sample of national poverty lines.

The regional rankings are not robust to the poverty line. Two changes are notable. At lower lines (under $2 per day), Sub-Saharan Africa has the highest incidence of poverty, but this switches to South Asia at higher lines. Second, the poverty rate for the Middle-East and North Africa exceeds that of Latin America at $2 or higher, but the ranking reverses at lower lines. (Intuitively, these differences reflect the higher inequality found in Africa and Latin America.)

At the lowest line of $1.00 per day, 35 percent of the poor live in Sub-Saharan Africa, though this falls to 20 percent at the $2.50 line (Table 1). The share of living in South Asia is fairly stable, at around 40 percent, but the share in East Asia rises markedly as the poverty line rises, from 20 percent for the $1.00 line to 31 percent for $2.50.

Measures such as the poverty rate (the “headcount index”) and the corresponding count of the number of poor are known to have limitations as measures of poverty; for example, if the poorest person becomes worse off then the headcount index will not change. A better measure in this respect is the poverty gap index, which is the mean distance below the poverty line as a proportion of the line where the mean is taken over the whole population, counting the non-poor as having zero poverty gaps. The poverty gap index for the developing world as a whole in 2005 is 7.6 percent for the $1.25 line (Chen and Ravallion 2008). To put this number in perspective, the GDP per capita of the developing world was $11.30 per day in 2005 (at 2005 PPP). The aggregate poverty gap for the $1.25 line is 0.84 percent of GDP per capita, while it rises to 3.29 percent for the $2 line. World (including the OECD countries) GDP per capita was $24.58 per day in 2005, implying that the global aggregate poverty gap was 0.33 percent of global GDP using the $1.25 line and 1.28 percent using the $2 line.

Comparisons over time

The results confirm that we are still making progress in reducing global poverty. The percentage living under $1.25 a day fell from 52 percent in 1981 to 42 percent in 1990, and then fell to 25 percent in 2005. The conclusion that poverty has fallen is also robust to the choice of poverty line or poverty measure. This is evident if one calculates the empirical cumulative distribution function (CDF) up to (say) $13 per day, which is the average official poverty line in the United States in 2005. Figure 2 plots the CDFs for 1981, 1990 and 2005. First order dominance is indicated. In 2005, 95.7 percent of the population of the developing world lived below the US poverty line; 25 years earlier it was 96.7 percent.

Based on the trend over 1981-2005, we are still on track for attaining the first of the UN’s Millennium Development Goals, namely to halve the 1990 poverty rate by 2015. The trend rate of decline in the $1.25 a day poverty rate over 1981–2005 was 1 percentage point per year. (Regressing the poverty rate on time the estimated trend is –0.99 percent per year with a standard error of 0.06 percent). Simply projecting this trend forward to 2015, the estimated headcount index for that year is 16.6 percent (standard error of 1.5 percent). Given that the 1990 poverty rate was 41.6 percent, the new estimates confirm the conclusion of past research that the developing world as a whole is on track to achieve the MDG of halving the 1990 poverty rate by 2015. (This also holds at the upper bound of the 95 percent confidence interval for our projected poverty rate for 2015.)

Clearly that is good news, but there are reasons for caution. First, the past trend of poverty reduction will not get us below the one billion mark until about 2015; there will still be a lot of very poor people in the world. And if we did no better than attaining the MDG that would leave a staggering 1.3 billion people in poverty in 2005. Success in the MDG is no basis for complacency in the fight against poverty.

Second, a staggering total of 1.2 billion people lived between $1.25 and (say) $2.00 a day in 2005 (see Table 1). While many people have reached the $1.25 a day threshold, many are still very poor, and clearly vulnerable to downside shocks. The series of poverty measures reported in Chen and Ravallion (2008) go up to 2005; lags in household survey data availability make it hard to make more recent estimates. However, the steep rise in food, fuel, and fertilizer prices since 2007 has almost certainly delayed progress against poverty since 2005, and the global financial crisis currently spilling over to the developing world threatens to delay that progress even further.

Third, the developing world outside China will not attain the MDG without a higher rate of poverty reduction than seen over 1981-2005. Progress has been highly uneven and the composition of world poverty has changed noticeably over time. The number of poor has fallen sharply in East Asia, but risen elsewhere (Table 1). For East Asia, the MDG of halving the 1990 “$1 per day” poverty rate by 2015 had already been reached a little after 2002. Again, China’s progress against absolute poverty was a key factor; looking back to 1981, China’s incidence of poverty (measured by the percentage below $1.25 per day) was roughly twice that for the rest of the developing world; by the mid-1990s, the Chinese poverty rate had fallen well below average. There were over 600 million fewer people living under $1.25 per day in China in 2005 than 25 years earlier. The persistently high incidence of poverty in Sub-Saharan Africa is notable. The region’s poverty rate both started and ended the period at about 50 percent, which means that the number of poor in Africa rose from about 200 million to 380 million; 100 million people have been added to Africa’s poverty count since 1990. Thankfully, there are some recent signs of progress. Africa’s poverty rate peaked in 1996 at 59 percent and has been falling since—stemming largely from higher rates of economic growth. But even this recent reduction in the incidence of poverty has not been enough to bring down the number of poor in Africa, given high population growth.

Looking forward

The developing countries face a severe challenge in maintaining past progress against poverty. This will require a combination of higher growth rates with policies that can help assure that poor people have the opportunity to participate in, and contribute to, that growth. The developing world overflows with lessons on both successes and failures in fighting poverty, and all countries need to learn pragmatically from those lessons. Better data on poverty is a key ingredient in that task.